NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The Company and Basis of Presentation
Description of the business:
Blucora, Inc. (the
"Company"
or
"Blucora"
) operates
two
businesses: a Wealth Management business and an online Tax Preparation business. The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries (
"HD Vest"
). HDV Holdings, Inc. is the parent company of the Wealth Management business and owns all outstanding shares of HD Vest, Inc., which serves as a holding company for the various financial services subsidiaries. Those subsidiaries include HD Vest Investment Securities, Inc. (an introducing broker-dealer), HD Vest Advisory Services, Inc. (a registered investment advisor), and HD Vest Insurance Agency, LLC (an insurance broker) (collectively referred to as the
"Wealth Management business"
or the
"Wealth Management segment"
). The Tax Preparation business consists of the operations of TaxAct, Inc. (
"TaxAct"
) and provides digital tax preparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com (collectively referred to as the
"Tax Preparation business"
or the
"Tax Preparation segment"
).
Prior to 2017, the Company also operated an internet Search and Content business and an E-Commerce business through 2016. The Search and Content business operated through the InfoSpace LLC subsidiary (
"InfoSpace"
), and the E-Commerce business consisted of the operations of Monoprice, Inc. (
"Monoprice"
).
On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market (the
"Strategic Transformation"
). Strategic Transformation refers to the Company's transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest (see "Note 3: Business Combinations") and the divestitures of the Search and Content and E-Commerce businesses in 2016 (see "Note 4: Discontinued Operations"). As part of the Strategic Transformation and "One Company" operating model, the Company announced on October 27, 2016 plans to relocate its corporate headquarters by
June 2017
from Bellevue, Washington to Irving, Texas. The actions to relocate corporate headquarters were intended to drive efficiencies and improve operational effectiveness (see "Note 5: Restructuring"). The restructuring is now substantially complete and it is expected to be completed by early 2018.
Segments:
T
he Company has
two
reportable segments: the Wealth Management segment and the Tax Preparation segment.
Reclassification
: The Company reclassified certain amounts on its consolidated statements of cash flows related to excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the
"Recent accounting pronouncements"
section of "Note 2: Summary of Significant Accounting Policies" for additional information.
Note 2: Summary of Significant Accounting Policies
Interim financial information:
The accompanying consolidated financial statements have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission (the
"SEC"
) for interim financial reporting. These consolidated financial statements are unaudited and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (
"GAAP"
) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Part II Item 8 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
. Interim results are not necessarily indicative of results for a full year.
Cash, cash equivalents, and restricted cash:
The following table presents cash, cash equivalents, and restricted cash as reported on the consolidated balance sheets that equal the total amounts on the consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
Cash and cash equivalents
|
$
|
78,558
|
|
|
$
|
71,165
|
|
|
$
|
51,713
|
|
|
$
|
55,473
|
|
Cash segregated under federal or other regulations
|
313
|
|
|
630
|
|
|
2,355
|
|
|
3,557
|
|
Restricted cash included in "Prepaid expenses and other current assets, net"
|
425
|
|
|
100
|
|
|
250
|
|
|
100
|
|
Restricted cash included in "Other long-term assets"
|
550
|
|
|
700
|
|
|
550
|
|
|
700
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
79,846
|
|
|
$
|
72,595
|
|
|
$
|
54,868
|
|
|
$
|
59,830
|
|
Cash segregated under federal and other regulations is held in a segregated bank account for the exclusive benefit of the Company’s Wealth Management business customers. Restricted cash included in prepaid expenses and other current assets, net and other long-term assets represents amounts pledged as collateral for certain of the Company's banking arrangements.
Fair value of financial instruments
: The Company measures its cash equivalents, available-for-sale investments, and contingent consideration liability at fair value. The Company considers the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
Cash equivalents and debt securities are classified within Level 2 (see "Note 6: Fair Value Measurements") of the fair value hierarchy because the Company values them utilizing market observable inputs. Unrealized gains and losses are included in "
Accumulated other comprehensive income (loss)
" on the consolidated balance sheets, and amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
The Company has a contingent consideration liability that is related to the Company's 2015 acquisition of SimpleTax Software Inc. (
"SimpleTax"
) and is classified within Level 3 (see "Note 6: Fair Value Measurements") of the fair value hierarchy because the Company values it utilizing significant inputs not observable in the market. Specifically, the Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment, and the discount rate. The change in the fair value of the contingent consideration liability is recognized in "General and administrative" expense on the consolidated statements of comprehensive income for the period in which the fair value changes.
Concentration of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable, and commissions receivable. These instruments are generally unsecured and uninsured.
For cash equivalents, short-term investments, and commissions receivable, the Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions and investment sponsors that are expected to be able to fully perform under the terms of the agreement.
Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States operating in a variety of geographic areas. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.
Recent accounting pronouncements:
Changes to GAAP are established by the Financial Accounting Standards Board (
"FASB"
) in the form of accounting standards updates (
"ASUs"
) to the FASB’s Accounting Standards Codification (
"ASC"
). The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations. The Company currently is evaluating, or has adopted, ASUs that impact the following areas:
Revenue recognition
- In May 2014, the FASB issued guidance codified in ASC 606, "Revenue from Contracts with Customers," which amends the guidance in former ASC 605 "Revenue Recognition." The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This will be achieved in a five-step process. Enhanced disclosures also will be required. This guidance is effective on a retrospective basis--either to each reporting period presented or with the cumulative effect of initially applying this guidance recognized at the date of initial application--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning
after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The Company will adopt the requirements of the new standard on January 1, 2018, utilizing the modified retrospective transition method. Upon adoption, the Company will recognize the cumulative effect of adopting this ASU as an adjustment to the opening balance of retained earnings. Prior periods will not be retrospectively adjusted. The Company expects that the adoption of this ASU will not have a material impact to its consolidated financial statements, including the presentation of revenues in the statement of comprehensive income.
Leases (ASU 2016-02)
- In February 2016, the FASB issued an ASU on lease accounting, whereby lease assets and liabilities, whether arising from leases that are considered operating or finance (capital) and have a term of twelve months or less, will be recognized on the balance sheet. Enhanced qualitative disclosures also will be required. This guidance is effective on a modified retrospective basis--with various practical expedients related to leases that commenced before the effective date--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Early adoption is permitted. The Company currently is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
Stock-based compensation (ASU 2016-09)
- In March 2016, the FASB issued an ASU on employee share-based payment accounting. The ASU requires that excess tax benefits and deficiencies be recognized as income tax benefit or expense, rather than as additional paid-in capital. In addition, the ASU requires that excess tax benefits be recorded in the period that shares vest or settle, regardless of whether the benefit reduces taxes payable in the same period. Cash flows related to excess tax benefits will be included as an operating activity, and no longer classified as a financing activity, in the statement of cash flows. This guidance was effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2016. The guidance related to the recognition of excess tax benefits and deficiencies as income tax benefit or expense was effective on a prospective basis, and the guidance related to the timing of excess tax benefit recognition was effective using a modified retrospective transition method with a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The cash flow presentation guidance was effective on a retrospective or prospective basis.
The Company implemented this ASU on January 1, 2017 and recorded a cumulative-effect adjustment of
$51.5 million
to credit retained earnings for deferred tax assets related to net operating losses that arose from excess tax benefits, which the Company has deemed realizable. In addition to this:
|
|
•
|
At the time of adoption and on a prospective basis, the primary impact of adoption was the recognition of excess tax benefits and deficiencies, including deferred tax assets related to net operating losses that arose from excess tax benefits which the Company has deemed realizable, in the income tax provision (rather than in additional paid-in capital). This caused income taxes to differ from taxes at the statutory rates in
2017
. For the three months ended
September 30, 2017
, the Company recognized an estimated
$7.0 million
increase to the income tax provision, which resulted in a
$7.0 million
decrease to income from continuing operations and net income attributable to Blucora, a
$0.15
decrease to basic earnings per share, and a
$0.15
decrease to diluted earnings per share. For the
nine months ended September 30, 2017
, the Company recognized an estimated
$0.4 million
increase
to the income tax provision, which resulted in a
$0.4 million
decrease
to income from continuing operations and net income attributable to Blucora, a
$0.01
decrease
to basic earnings per share, and a
$0.01
decrease
to diluted earnings per share.
|
|
|
•
|
The Company applied the cash flow presentation guidance on a retrospective basis, restating the consolidated statements of cash flows to present excess tax benefits as an operating activity (rather than a financing activity). For the
three months ended September 30, 2016
, this resulted in a decrease to cash provided by operating activities from continuing operations of
$5.6 million
and a corresponding decrease to cash used by financing activities from continuing operations for the amount historically presented in the "excess tax benefits from stock-based award activity" line item in the consolidated statements of cash flows. For the
nine months ended September 30, 2016
, this resulted in an increase to cash provided by operating activities from continuing operations of
$21.4 million
and a corresponding increase to cash used by financing activities from continuing operations for the amount historically presented in the "excess tax benefits from stock-based award activity" line item in the consolidated statements of cash flows. The restatement had no impact on total cash flows for the period presented.
|
The ASU also clarifies that payments made to tax authorities on an employee's behalf for withheld shares should be presented as a financing activity in the statement of cash flows, allows the repurchase of more of an employee's shares for tax withholding purposes without triggering liability accounting, and provides an accounting policy election to account for forfeitures as they occur. The cash flow presentation requirements for payments made to tax authorities on an employee's
behalf had no impact to any periods presented, since such cash flows historically have been presented as a financing activity. The Company is not planning to change tax withholdings and will continue to estimate forfeitures in determining the amount of compensation cost to be recognized in each period.
Statement of cash flows and restricted cash (ASU 2016-18)
- In November 2016, the FASB issued an ASU on the classification and presentation of changes in restricted cash on the statement of cash flows. The ASU requires that the statement of cash flows explains the change during the period in the total of cash, cash equivalents, and restricted cash; therefore, the amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning and end of period total amounts on the statement of cash flows. This guidance is effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted. The guidance is effective on a retrospective basis. The Company elected to early adopt this guidance as of January 1, 2017. The reclassification was not material to the periods presented and had no impact on total cash flows, income from continuing operations, or net income attributable to Blucora for the periods presented. See the
"Cash, cash equivalents, and restricted cash"
section of this note for additional information.
Note 3: Business Combinations
HD Vest:
On
December 31, 2015
and pursuant to the Purchase Agreement dated October 14, 2015, the Company acquired HD Vest for
$613.7 million
, after a
$1.8 million
final working capital adjustment in the first quarter of 2016. HD Vest provides wealth management solutions for financial advisors and their clients. In connection with the acquisition, certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. A portion of those shares were sold to the Company in exchange for a promissory note. After giving effect to the rollover shares and related purchase of the rollover shares for the promissory note, the Company indirectly owns
95.52%
of HDV Holdings, Inc., with the remaining
4.48%
noncontrolling interest held collectively by the rollover management members and subject to put and call arrangements exercisable beginning in 2019.
The Purchase Agreement dictated that the Company placed into escrow
$20.0 million
of additional consideration that was contingent upon HD Vest's 2015 earnings performance. The contingent consideration threshold was not achieved; therefore, the amount was excluded from the purchase price and recorded as a receivable in "Other receivables" as of December 31, 2015 for the amount that was returned to the Company from the escrow agent in the first quarter of 2016.
Note 4: Discontinued Operations
On
November 17, 2016
, the Company closed on an agreement with
YFC-Boneagle Electric Co., Ltd
. (
"
YFC
"
), under which
YFC
acquired the E-Commerce business for
$40.5 million
, which included a working capital adjustment. Of this amount,
$39.5 million
was received in the fourth quarter of 2016 and
$1.0 million
was received in the second quarter of 2017--both amounts were included in investing activities from discontinued operations in the consolidated statements of cash flows. The Company used all of the proceeds to pay down debt.
On
August 9, 2016
, the Company closed on an agreement with
OpenMail LLC
(
"
OpenMail
"
), under which
OpenMail
acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for
$45.2 million
, which included a working capital adjustment, and was included in investing activities from discontinued operations in the consolidated statements of cash flows. The Company used all of the proceeds to pay down debt.
Summarized financial information for discontinued operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Major classes of items in net income (loss):
|
|
|
|
|
|
|
|
Revenues
|
$
|
—
|
|
|
$
|
53,721
|
|
|
$
|
—
|
|
|
$
|
209,108
|
|
Operating expenses
|
—
|
|
|
(50,952
|
)
|
|
—
|
|
|
(192,874
|
)
|
Other loss, net
|
—
|
|
|
(415
|
)
|
|
—
|
|
|
(844
|
)
|
Income from discontinued operations before income taxes
|
—
|
|
|
2,354
|
|
|
—
|
|
|
15,390
|
|
Loss on sale of discontinued operations before income taxes
|
—
|
|
|
(29,509
|
)
|
|
—
|
|
|
(68,034
|
)
|
Discontinued operations, before income taxes
|
—
|
|
|
(27,155
|
)
|
|
—
|
|
|
(52,644
|
)
|
Income tax expense
|
—
|
|
|
(13,373
|
)
|
|
—
|
|
|
(5,337
|
)
|
Discontinued operations, net of income taxes
|
$
|
—
|
|
|
$
|
(40,528
|
)
|
|
$
|
—
|
|
|
$
|
(57,981
|
)
|
Note 5: Restructuring
The following table summarizes the activity in the restructuring liability (in thousands), resulting from the relocation of corporate headquarters to Irving, Texas as part of the Strategic Transformation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related Termination Costs
|
|
Contract Termination Costs
|
|
Fixed Asset Impairments
|
|
Stock-Based Compensation
|
|
Other Costs
|
|
Total
|
Balance as of December 31, 2016
|
$
|
4,234
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,234
|
|
Restructuring charges
|
(30
|
)
|
|
(241
|
)
|
|
1,878
|
|
|
981
|
|
|
32
|
|
|
2,620
|
|
Payments
|
(434
|
)
|
|
(161
|
)
|
|
—
|
|
|
—
|
|
|
(32
|
)
|
|
(627
|
)
|
Non-cash
|
—
|
|
|
1,457
|
|
|
(1,878
|
)
|
|
(981
|
)
|
|
—
|
|
|
(1,402
|
)
|
Balance as of June 30, 2017
|
3,770
|
|
|
1,055
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,825
|
|
Restructuring charges
|
(3
|
)
|
|
|
|
|
|
97
|
|
|
12
|
|
|
106
|
|
Payments
|
(2,447
|
)
|
|
(256
|
)
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
(2,715
|
)
|
Non-cash
|
—
|
|
|
—
|
|
|
—
|
|
|
(97
|
)
|
|
—
|
|
|
(97
|
)
|
Balance as of September 30, 2017
|
$
|
1,320
|
|
|
$
|
799
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,119
|
|
Employee-related termination costs primarily include severance benefits, under both ongoing and one-time benefit arrangements that are payable at termination dates throughout 2017, with the majority paid in the second half of 2017. Contract termination costs and fixed asset impairments were incurred in connection with the Bellevue facility's operating lease and related fixed assets, which are described further in the next two paragraphs, respectively. Stock-based compensation primarily includes the impact of equity award modifications associated with employment contracts for certain individuals impacted by the relocation, as well as forfeitures that were recorded for severed employees. Other costs include office moving costs.
The Company has a non-cancelable operating lease that runs through 2020 for its former corporate headquarters in Bellevue, Washington, which the Company occupied until May 2017. In March 2017, the Company agreed to a sublease for the entire Bellevue facility, which was effective June 1, 2017 and expires on September 30, 2020, consistent with the underlying operating lease. Under that sublease agreement, the Company will not recover all of its remaining lease rental obligations (including common area maintenance costs and real estate taxes) and, therefore, recognized a loss on sublease of
$1.1 million
. See "Note 9: Commitments and Contingencies" for additional information on the sublease. The Company also wrote-off its
$1.5 million
deferred rent liability (a non-cash item), related to various lease incentives that had been provided originally by the landlord, and incurred broker commissions related to the sublease agreement. All of these items were recorded as contract termination costs in the first quarter of 2017.
The Company began receiving sublease offers in the first quarter of 2017, at which point it was indicated that the remaining lease rental obligations, and the related value for the leasehold improvements and the office furniture and equipment, would not be fully recovered. As a result and given the nature of these fixed assets, the Company fully impaired the
$1.9 million
carrying value of those assets in the first quarter of 2017.
Note 6: Fair Value Measurements
In accordance with ASC 820, "Fair Value Measurements and Disclosures", certain of the Company's assets and liabilities, which are carried at fair value, are classified in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.
The fair value hierarchy of the Company’s assets and liabilities carried at fair value and measured on a recurring basis was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at the reporting date using
|
|
September 30, 2017
|
|
Quoted prices in
active markets
using identical
assets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
Cash equivalents: money market and other funds
|
$
|
10,827
|
|
|
$
|
—
|
|
|
$
|
10,827
|
|
|
$
|
—
|
|
Total assets at fair value
|
$
|
10,827
|
|
|
$
|
—
|
|
|
$
|
10,827
|
|
|
$
|
—
|
|
Acquisition-related contingent consideration liability
|
$
|
2,704
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,704
|
|
Total liabilities at fair value
|
$
|
2,704
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at the reporting date using
|
|
December 31, 2016
|
|
Quoted prices in
active markets
using identical
assets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
Cash equivalents:
|
|
|
|
|
|
|
|
U.S government securities
|
$
|
2,749
|
|
|
$
|
—
|
|
|
$
|
2,749
|
|
|
$
|
—
|
|
Money market and other funds
|
4,090
|
|
|
—
|
|
|
4,090
|
|
|
—
|
|
Commercial paper
|
1,999
|
|
|
—
|
|
|
1,999
|
|
|
—
|
|
Taxable municipal bonds
|
1,301
|
|
|
—
|
|
|
1,301
|
|
|
—
|
|
Total cash equivalents
|
10,139
|
|
|
—
|
|
|
10,139
|
|
|
—
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
U.S. government securities
|
2,000
|
|
|
—
|
|
|
2,000
|
|
|
—
|
|
Commercial paper
|
1,998
|
|
|
—
|
|
|
1,998
|
|
|
—
|
|
Time deposits
|
807
|
|
|
—
|
|
|
807
|
|
|
—
|
|
Taxable municipal bonds
|
2,296
|
|
|
—
|
|
|
2,296
|
|
|
—
|
|
Total debt securities
|
7,101
|
|
|
—
|
|
|
7,101
|
|
|
—
|
|
Total assets at fair value
|
$
|
17,240
|
|
|
$
|
—
|
|
|
$
|
17,240
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration liability
|
$
|
3,421
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,421
|
|
Total liabilities at fair value
|
$
|
3,421
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,421
|
|
A reconciliation of Level 3 items measured at fair value on a recurring basis is as follows (in thousands):
|
|
|
|
|
Acquisition-related contingent consideration liability:
|
|
Balance as of December 31, 2016
|
$
|
3,421
|
|
Payment
|
(946
|
)
|
Foreign currency transaction loss
|
229
|
|
Balance as of September 30, 2017
|
$
|
2,704
|
|
The contingent consideration liability is related to the Company's 2015 acquisition of SimpleTax. The full contractual obligation under the contingent consideration arrangement was accrued during the year ended December 31, 2016. Payments are contingent upon product availability and revenue performance over a three-year period ending December 31, 2018 and are expected to occur annually over that period. The first payment was made in the first quarter of 2017 and classified as a financing activity on the consolidated statements of cash flows. The remaining payments are expected through 2019. The
foreign currency transaction loss
was included in "
Other loss, net
" on the consolidated statements of comprehensive income. As of
September 30, 2017
,
$1.3 million
of the contingent consideration liability was included in "Accrued expenses and other current liabilities" and
$1.4 million
in "Other long-term liabilities" on the consolidated balance sheets.
The contractual maturities of the debt securities classified as available-for-sale at
December 31, 2016
were less than one year.
The cost and fair value of available-for-sale investments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
Gross unrealized
gains
|
|
Gross unrealized
losses
|
|
Fair
value
|
Balance as of December 31, 2016
|
$
|
7,102
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
7,101
|
|
The Company had non-recurring Level 3 fair value measurements in 2017 and 2016 related to the redemption and repurchase of its Convertible Senior Notes. See "Note 7: Debt" for details.
Note 7: Debt
The Company’s debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Principal
amount
|
|
Discount
|
|
Debt issuance costs
|
|
Net
carrying
value
|
|
Principal
amount
|
|
Discount
|
|
Debt issuance costs
|
|
Net
carrying
value
|
Senior secured credit facility
|
$
|
350,000
|
|
|
$
|
(1,681
|
)
|
|
$
|
(4,727
|
)
|
|
$
|
343,592
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
TaxAct - HD Vest 2015 credit facility
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
260,000
|
|
|
(7,124
|
)
|
|
(5,295
|
)
|
|
247,581
|
|
Convertible Senior Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
172,859
|
|
|
(6,913
|
)
|
|
(1,770
|
)
|
|
164,176
|
|
Note payable, related party
|
3,200
|
|
|
—
|
|
|
—
|
|
|
3,200
|
|
|
3,200
|
|
|
—
|
|
|
—
|
|
|
3,200
|
|
Total debt
|
$
|
353,200
|
|
|
$
|
(1,681
|
)
|
|
$
|
(4,727
|
)
|
|
$
|
346,792
|
|
|
$
|
436,059
|
|
|
$
|
(14,037
|
)
|
|
$
|
(7,065
|
)
|
|
$
|
414,957
|
|
Senior secured credit facility:
On
May 22, 2017
, Blucora entered into an agreement with a syndicate of lenders for the purposes of refinancing the credit facility previously entered into in 2015 for the purposes of financing the HD Vest acquisition (the
"TaxAct - HD Vest 2015 credit facility"
), redeeming its Convertible Senior Notes that were outstanding at the time (the
"Notes"
), and providing future working capital and capital expenditure flexibility. Consequently, the TaxAct - HD Vest 2015 credit facility was repaid in full and the commitments under the TaxAct - HD Vest revolving credit facility were terminated. The Blucora senior secured credit facility consists of a committed
$50.0 million
revolving credit loan, which includes a letter of credit sub-facility, and a
$375.0 million
term loan for an aggregate
$425.0 million
credit facility. The final maturity dates of the revolving credit loan and term loan are
May 22, 2022
and
May 22, 2024
, respectively. Obligations under the credit facility are guaranteed by certain of Blucora's subsidiaries and secured by the assets of Blucora and those subsidiaries.
Blucora borrowed
$375.0 million
under the term loan when it entered into the senior secured credit facility. Principal payments on the term loan are payable
quarterly
in an amount equal to
0.25%
of the initial outstanding principal. The interest rate on the term loan is variable at the London Interbank Offered Rate (
"LIBOR"
), subject to a floor of
1.00%
, plus a margin
of
3.75%
, payable at the end of each interest period. Through September 30, 2017, Blucora has made prepayments of
$25.0 million
towards the term loan.
Blucora may borrow under the revolving credit loan in an aggregate principal amount not less than
$2.0 million
or any whole multiple of
$1.0 million
in excess thereof. Principal payments on the revolving credit loan are payable
at maturity
. The interest rate on the revolving credit loan is variable, with initial draws at LIBOR plus a margin of
3.00%
. Subsequent draws on the revolving credit loan also have variable interest rates, based upon LIBOR plus a margin of between
2.75%
and
3.00%
. In each case, the applicable margin within the range depends upon Blucora's Consolidated First Lien Net Leverage Ratio (as defined in the credit agreement for the credit facility) over the previous four quarters. Interest is payable at the end of each interest period. Blucora has not borrowed any amounts under the revolving credit loan.
Blucora has the right to permanently reduce and/or prepay, without premium or penalty (other than customary LIBOR breakage costs), the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than
$5.0 million
(
$2.0 million
in the case of prepayments) or any whole multiple of
$1.0 million
in excess thereof, except for prepayments through
November 22, 2017
, which require a prepayment of a premium equal to
1.00%
of the total principal amount prepaid. Beginning on December 31, 2018, Blucora will be required to make annual prepayments if certain levels of cash flow are achieved.
The credit facility includes financial and operating covenants, including a consolidated total net leverage ratio, which are set forth in detail in the credit agreement. As of
September 30, 2017
, Blucora was in compliance with all of the financial and operating covenants.
As of
September 30, 2017
, the credit facility's principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
In connection with the refinancing, the Company performed an analysis by creditor and determined that the refinancing qualified as an extinguishment. As a result, the Company recognized a loss on debt extinguishment during the three months ended June 30, 2017, which was recorded in "
Other loss, net
" on the consolidated statements of comprehensive income and consisted of the following (in thousands):
|
|
|
|
|
Loss on debt extinguishment - TaxAct - HD Vest 2015 credit facility
|
$
|
9,593
|
|
Loss on debt extinguishment - Convertible Senior Notes
|
6,715
|
|
Total loss on debt extinguishment
|
$
|
16,308
|
|
The amount for the TaxAct - HD Vest 2015 credit facility included the write-off of the remaining unamortized discount and debt issuance costs. For the Notes, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the redeemed Notes. The fair value was based on a discounted cash flow analysis of the Notes' principal and related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a loss and recorded in "
Other loss, net
" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.
TaxAct - HD Vest 2015 credit facility:
The Company had repayment activity of
$64.0 million
and
$105.0 million
during the
nine months ended September 30, 2017
and
2016
, respectively. These repayments resulted in the acceleration of a portion of the unamortized discount and debt issuance costs, which were recorded in "
Other loss, net
" on the consolidated statements of comprehensive income.
Convertible Senior Notes:
In June 2017, the Company redeemed almost all of the outstanding Notes for cash with proceeds from the senior secured credit facility.
During the
nine months ended September 30, 2016
, the Company repurchased
$28.4 million
of the Notes for cash of
$20.7 million
. Similar to the analysis performed for the Notes that were redeemed in June 2017, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the repurchased Notes. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a gain, since the Notes were repurchased below par value, and recorded in "
Other loss, net
" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.
The following table sets forth total interest expense, prior to the refinancing, related to the Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Contractual interest expense (Cash)
|
$
|
—
|
|
|
$
|
1,836
|
|
|
$
|
3,141
|
|
|
$
|
5,782
|
|
Amortization of debt issuance costs (Non-cash)
|
—
|
|
|
231
|
|
|
401
|
|
|
704
|
|
Accretion of debt discount (Non-cash)
|
—
|
|
|
901
|
|
|
1,567
|
|
|
2,749
|
|
Total interest expense
|
$
|
—
|
|
|
$
|
2,968
|
|
|
$
|
5,109
|
|
|
$
|
9,235
|
|
Note payable, related party:
The note payable is with the former President of HD Vest and arose in connection with the acquisition of HD Vest. Certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the acquisition's closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. The former President of HD Vest sold a portion of his shares to the Company in exchange for the note. The note will be paid over a
three
-year period, with
50%
paid in year one (
$3.2 million
was paid in December 2016),
40%
paid in year two, and
10%
paid in year three. The note bears interest at a rate of
5%
per year, with a principal amount that approximates its fair value.
Note 8: Redeemable Noncontrolling Interests
A reconciliation of redeemable noncontrolling interests is as follows (in thousands):
|
|
|
|
|
Balance as of December 31, 2016
|
$
|
15,696
|
|
Net income attributable to noncontrolling interests
|
466
|
|
Balance as of September 30, 2017
|
$
|
16,162
|
|
The redemption amount at
September 30, 2017
was
$12.4 million
.
Note 9: Commitments and Contingencies
Significant events during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of the Company’s business, include debt activity (as discussed further in "Note 7: Debt"), payment of a portion of the acquisition-related contingent consideration liability (as discussed further in "Note 6: Fair Value Measurements"), estimated sublease income of
$3.8 million
primarily related to the sublease agreement for the Bellevue facility (as discussed further in "Note 5: Restructuring"), purchase commitments with a vendor to provide cloud computation services of
$11.3 million
over the next
four
years, and a commitment to switch to a new clearing firm provider that has been selected by the Company by the third quarter of 2018. Additional information on the Company’s Commitments and Contingencies can be found in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
Litigation:
From time to time, the Company is subject to various legal proceedings or claims that arise in the ordinary course of business. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. The following is a brief description of the more significant legal proceedings. Although the Company believes that resolving such claims, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties.
On December 12, 2016, a shareholder derivative action was filed by Jeffrey Tilden against the Company, as a nominal defendant, Andrew Snyder, who was a director of the Company at that time, certain companies affiliated with Mr. Snyder, a former officer of the Company, GCA Savvian Advisors, LLC (
"GCA Savvian"
), and certain other current and former members of the Blucora Board of Directors, in the Superior Court of the State of California in and for the County of San Francisco. The complaint asserts claims for breaches of fiduciary duty against certain current and former directors of the Company related to the Company’s share repurchases and the Company’s acquisitions of HD Vest and Monoprice. The complaint asserts a claim against GCA Savvian, the Company’s financial advisor in connection with the HD Vest acquisition, for aiding and abetting breaches of fiduciary duty. The complaint also asserts a claim for insider trading against Mr. Snyder, a former officer of the Company, and certain companies affiliated with Mr. Snyder. The derivative action does not seek monetary damages from the Company. The complaint seeks corporate governance reforms, declaratory relief, monetary damages from the other defendants, attorney’s fees and prejudgment interest.
On March 10, 2017, the Company filed a motion to dismiss for improper venue as a result of a forum selection provision in the Company’s bylaws that required the plaintiff to file his derivative fiduciary duty claims in Delaware. Other defendants also filed motions to quash the summons due to a lack of personal jurisdiction over them. On July 25, 2017, the Court granted the Company's motion to dismiss. The case has been stayed by the Court until November 22, 2017, after which the case will be dismissed without further order of the Court.
The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors, and the agreement entered into with GCA Savvian in connection with the acquisition of HD Vest also contained indemnification provisions. Pursuant to these agreements, the Company may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.
Note 10: Stockholders’ Equity
Stock-based compensation:
The Company included the following amounts for stock-based compensation expense, which related to stock options, restricted stock units (
"RSUs"
), and the Company’s employee stock purchase plan (
"ESPP"
), in the consolidated statements of comprehensive income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of revenue
|
$
|
412
|
|
|
$
|
52
|
|
|
$
|
546
|
|
|
$
|
117
|
|
Engineering and technology
|
225
|
|
|
434
|
|
|
734
|
|
|
1,167
|
|
Sales and marketing
|
529
|
|
|
661
|
|
|
1,801
|
|
|
1,688
|
|
General and administrative
|
1,966
|
|
|
2,217
|
|
|
5,353
|
|
|
7,644
|
|
Restructuring
|
97
|
|
|
—
|
|
|
1,078
|
|
|
—
|
|
Total in continuing operations
|
3,229
|
|
|
3,364
|
|
|
9,512
|
|
|
10,616
|
|
Discontinued operations
|
—
|
|
|
(727
|
)
|
|
—
|
|
|
2,014
|
|
Total
|
$
|
3,229
|
|
|
$
|
2,637
|
|
|
$
|
9,512
|
|
|
$
|
12,630
|
|
In the second quarter of 2017, the Company granted
350,000
non-qualified stock options to certain HD Vest financial advisors, who are considered non-employees. These stock options vest fully
three
years from the date of grant. The Company used the Black-Scholes-Merton valuation method to calculate stock-based compensation, using assumptions for the risk-free interest rate, expected dividend yield, expected volatility, and expected life under the same methodology that is used for employee grants. Since these are non-employee grants, stock-based compensation expense will be remeasured at the end of each quarter. For the three and
nine months ended September 30, 2017
, stock-based compensation expense for these non-employees was
$0.4 million
and
$0.5 million
, respectively, and was recorded in "Cost of revenue" on the consolidated statements of comprehensive income.
Total net shares issued for stock options exercised, RSUs vested, and shares purchased pursuant to the ESPP were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock options exercised
|
1,243
|
|
|
—
|
|
|
3,651
|
|
|
140
|
|
RSUs vested
|
91
|
|
|
102
|
|
|
442
|
|
|
426
|
|
Shares purchased pursuant to ESPP
|
62
|
|
|
114
|
|
|
138
|
|
|
191
|
|
Total
|
1,396
|
|
|
216
|
|
|
4,231
|
|
|
757
|
|
Note 11: Segment Information
The Company has
two
reportable segments: the Wealth Management segment and the Tax Preparation segment. The former Search and Content and E-Commerce segments are included in discontinued operations. The Company’s Chief Executive Officer is its chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
Information on reportable segments currently presented to the Company’s chief operating decision maker and a reconciliation to consolidated net income are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue:
|
|
|
|
|
|
|
|
Wealth Management
|
$
|
86,809
|
|
|
$
|
80,088
|
|
|
$
|
254,772
|
|
|
$
|
233,496
|
|
Tax Preparation
|
3,362
|
|
|
3,149
|
|
|
156,936
|
|
|
135,614
|
|
Total revenue
|
90,171
|
|
|
83,237
|
|
|
411,708
|
|
|
369,110
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
Wealth Management
|
12,425
|
|
|
11,628
|
|
|
36,684
|
|
|
32,458
|
|
Tax Preparation
|
(6,238
|
)
|
|
(4,382
|
)
|
|
83,410
|
|
|
72,987
|
|
Corporate-level activity
|
(17,513
|
)
|
|
(17,754
|
)
|
|
(57,536
|
)
|
|
(54,153
|
)
|
Total operating income (loss)
|
(11,326
|
)
|
|
(10,508
|
)
|
|
62,558
|
|
|
51,292
|
|
Other loss, net
|
(5,241
|
)
|
|
(11,453
|
)
|
|
(39,149
|
)
|
|
(29,883
|
)
|
Income tax benefit (expense)
|
(166
|
)
|
|
8,537
|
|
|
(5,952
|
)
|
|
(8,899
|
)
|
Discontinued operations, net of income taxes
|
—
|
|
|
(40,528
|
)
|
|
—
|
|
|
(57,981
|
)
|
Net income (loss)
|
$
|
(16,733
|
)
|
|
$
|
(53,952
|
)
|
|
$
|
17,457
|
|
|
$
|
(45,471
|
)
|
Revenues by major category within each segment are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Wealth Management:
|
|
|
|
|
|
|
|
Commission
|
$
|
39,432
|
|
|
$
|
38,962
|
|
|
$
|
117,181
|
|
|
$
|
111,070
|
|
Advisory
|
37,588
|
|
|
32,705
|
|
|
107,078
|
|
|
95,759
|
|
Asset-based
|
6,526
|
|
|
5,476
|
|
|
19,276
|
|
|
16,689
|
|
Transaction and fee
|
3,263
|
|
|
2,945
|
|
|
11,237
|
|
|
9,978
|
|
Total Wealth Management revenue
|
$
|
86,809
|
|
|
$
|
80,088
|
|
|
$
|
254,772
|
|
|
$
|
233,496
|
|
Tax Preparation:
|
|
|
|
|
|
|
|
Consumer
|
$
|
3,149
|
|
|
$
|
2,950
|
|
|
$
|
143,239
|
|
|
$
|
122,678
|
|
Professional
|
213
|
|
|
199
|
|
|
13,697
|
|
|
12,936
|
|
Total Tax Preparation revenue
|
$
|
3,362
|
|
|
$
|
3,149
|
|
|
$
|
156,936
|
|
|
$
|
135,614
|
|
Note 12:
Net Income (Loss) Per Share
"
Basic net income (loss) per share
" is computed using the weighted average number of common shares outstanding during the period. "
Diluted net income (loss) per share
" is computed using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and vesting of unvested RSUs. Dilutive potential common shares are excluded from the computation of earnings per share if their effect is antidilutive.
The computation of basic and diluted
net income (loss) per share
attributable to Blucora, Inc. is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(16,733
|
)
|
|
$
|
(13,424
|
)
|
|
$
|
17,457
|
|
|
$
|
12,510
|
|
Net income attributable to noncontrolling interests
|
(164
|
)
|
|
(167
|
)
|
|
(466
|
)
|
|
(426
|
)
|
Income (loss) from continuing operations attributable to Blucora, Inc.
|
(16,897
|
)
|
|
(13,591
|
)
|
|
16,991
|
|
|
12,084
|
|
Loss from discontinued operations attributable to Blucora, Inc.
|
—
|
|
|
(40,528
|
)
|
|
—
|
|
|
(57,981
|
)
|
Net income (loss) attributable to Blucora, Inc.
|
$
|
(16,897
|
)
|
|
$
|
(54,119
|
)
|
|
$
|
16,991
|
|
|
$
|
(45,897
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
45,459
|
|
|
41,635
|
|
|
43,749
|
|
|
41,404
|
|
Dilutive potential common shares
|
—
|
|
|
—
|
|
|
3,064
|
|
|
925
|
|
Weighted average common shares outstanding, diluted
|
45,459
|
|
|
41,635
|
|
|
46,813
|
|
|
42,329
|
|
Net income (loss) per share attributable to Blucora, Inc. - basic:
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.37
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
0.39
|
|
|
$
|
0.29
|
|
Discontinued operations
|
—
|
|
|
(0.97
|
)
|
|
—
|
|
|
(1.40
|
)
|
Basic net income (loss) per share
|
$
|
(0.37
|
)
|
|
$
|
(1.30
|
)
|
|
$
|
0.39
|
|
|
$
|
(1.11
|
)
|
Net income (loss) per share attributable to Blucora, Inc. - diluted:
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.37
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
0.36
|
|
|
$
|
0.29
|
|
Discontinued operations
|
—
|
|
|
(0.97
|
)
|
|
—
|
|
|
(1.37
|
)
|
Diluted net income (loss) per share
|
$
|
(0.37
|
)
|
|
$
|
(1.30
|
)
|
|
$
|
0.36
|
|
|
$
|
(1.08
|
)
|
Shares excluded
|
5,798
|
|
|
10,246
|
|
|
1,160
|
|
|
6,317
|
|
Shares excluded primarily related to the anti-dilutive effect of a net loss (for the three months ended September 30, 2017 and 2016), and stock options with an exercise price greater than the average price during the applicable periods.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the words "anticipate," "believe," "plan," "project," "expect," "future," "intend," "may," "will," "should," "could," "would,""estimate," "predict," "potential," "continue," and similar expressions. These forward-looking statements include, but are not limited to: statements regarding projections of our future financial performance; trends in our businesses; our future business plans and growth strategy, including our "Strategic Transformation;" and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs.
Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under Part II Item 1A, "Risk Factors," and elsewhere in this report. You should not rely on forward-looking statements included herein, which speak only as of the date of this Quarterly Report on Form 10-Q or the date specified herein. We do not undertake any obligation to update publicly any forward-looking statement to reflect new information, events, or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included under Part 1 Item 1 of this report, as well as with our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Our Business
Blucora (the
"Company," "Blucora,"
or
"we"
) operates two businesses: a Wealth Management business and an online Tax Preparation business.
The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries (collectively referred to as
"HD Vest"
or the
"Wealth Management Business"
). HD Vest provides wealth management solutions for financial advisors and their clients. Specifically, HD Vest provides an integrated platform of brokerage, investment advisory and insurance services to assist in making each financial advisor a financial service center for his/her clients. HD Vest was founded to help tax and accounting professionals integrate financial services into their practices. HD Vest primarily recruits independent tax professionals with established tax practices and offers specialized training and support, which allows them to join the HD Vest platform as independent financial advisors. HD Vest generates revenue primarily through commissions, quarterly investment advisory fees based on assets under management and other fees.
The Tax Preparation business consists of the operations of TaxAct, Inc. (collectively referred to as
"TaxAct"
or the
"Tax Preparation business"
). TaxAct provides digital do-it-yourself (
"DDIY"
) tax preparation solutions for consumers, small business owners, and tax professionals. TaxAct generates revenue primarily through its online service at www.TaxAct.com. The TaxAct website and the information contained therein or connected thereto is not intended to be incorporated by reference into this Report.
Strategic Transformation
On October 14, 2015, we announced our plans to acquire HD Vest and focus on the technology-enabled financial solutions market (the
"Strategic Transformation"
). The Strategic Transformation refers to our transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest and the divestitures of our Search and Content business that was operated through our former InfoSpace LLC subsidiary (
"InfoSpace"
) and our E-Commerce business that consisted of the operations of Monoprice, Inc. (
"Monoprice"
) in 2016. As part of the Strategic Transformation and our model of operating as "One Company", we announced on October 27, 2016 plans to relocate our corporate headquarters by
June 2017
from Bellevue, Washington to Irving, Texas. The transformation is intended to drive efficiencies and improve operational effectiveness.
In connection with the relocation of our corporate headquarters, we have incurred restructuring costs of approximately
$6.6 million
. These costs are recorded within corporate-level activity for segment purposes. See "Note 5: Restructuring" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information. We also have incurred costs that do not qualify for restructuring classification, such as recruiting and overlap in personnel expenses as we transition positions to Texas (
"Strategic Transformation Costs"
). The restructuring is now substantially complete and it is expected to be completed by early 2018.
For a discussion of the associated risks, see the sections under the heading "Risks Associated With our Strategic Transformation" in Part II Item 8 of our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Seasonality
Our Tax Preparation business is highly seasonal, with a significant portion of its annual revenue earned in the first four months of our fiscal year. During the third and fourth quarters, the Tax Preparation business typically reports losses in its operating income because revenue from the business is minimal while core operating expenses continue.
Comparability
We reclassified certain amounts on our consolidated statements of cash flows related to excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the
"Recent accounting pronouncements"
section of "Note 2: Summary of Significant Accounting Policies" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information.
RESULTS OF OPERATIONS
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Percentage
Change
|
|
2017
|
|
2016
|
|
Percentage
Change
|
Revenue
|
$
|
90,171
|
|
|
$
|
83,237
|
|
|
8
|
%
|
|
$
|
411,708
|
|
|
$
|
369,110
|
|
|
12
|
%
|
Operating income (loss)
|
$
|
(11,326
|
)
|
|
$
|
(10,508
|
)
|
|
8
|
%
|
|
$
|
62,558
|
|
|
$
|
51,292
|
|
|
22
|
%
|
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Revenue
increase
d approximately
$6.9 million
due to
increase
s of
$6.7 million
and
$0.2 million
in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
Operating loss
increased approximately
$0.8 million
, consisting of the
$6.9 million
increase
in revenue and offset by an
$7.8 million
increase
in operating expenses. Key changes in operating expenses were:
|
|
•
|
$5.9 million
increase
in the Wealth Management segment’s operating expenses primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts.
|
|
|
•
|
$2.1 million
increase
in the Tax Preparation segment’s operating expenses primarily due to higher maintenance fees, development costs and personnel expenses resulting from overall increased headcount supporting most functions.
|
|
|
•
|
$0.2 million
decrease
in corporate-level expense activity primarily due to changes in headcount across most functions.
|
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Revenue
increase
d approximately
$42.6 million
due to
increase
s of
$21.3 million
and
$21.3 million
in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
Operating income
increase
d approximately
$11.3 million
, consisting of the
$42.6 million
increase
in revenue and offset by a
$31.3 million
increase
in operating expenses. Key changes in operating expenses were:
|
|
•
|
$17.1 million
increase
in the Wealth Management segment’s operating expenses due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher net personnel expenses as we continue to standardize employee benefits across our businesses.
|
|
|
•
|
$10.9 million
increase
in the Tax Preparation segment’s operating expenses primarily due to higher spending on marketing, higher professional services fees mostly related to marketing and development projects, higher data center costs related to software support and maintenance fees, increases in growth initiative investments, and higher personnel expenses resulting from overall increased headcount supporting most functions.
|
|
|
•
|
$3.4 million
increase
in corporate-level expense activity primarily due to Strategic Transformation Costs and increased headcount supporting most functions, partially offset by lower stock-based compensation costs due to fewer grants in the current year and higher expense recognized in the prior year related to HD Vest grants in 2016, partially offset by activity within our Tax Preparation business due to prior forfeitures.
|
SEGMENT REVENUE/OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S. (
"GAAP"
) and include certain reconciling items attributable to each of the segments. Segment information appearing in "Note 11: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial
Statements in Part I Item 1 of this report is presented on a basis consistent with our current internal management financial reporting. We have two reportable segments: Wealth Management and Tax Preparation. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of acquired intangible assets, restructuring, other loss, net, and income taxes to segment operating results. We analyze these separately.
Wealth Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Percentage
Change
|
|
2017
|
|
2016
|
|
Percentage
Change
|
Revenue
|
$
|
86,809
|
|
|
$
|
80,088
|
|
|
8
|
%
|
|
$
|
254,772
|
|
|
$
|
233,496
|
|
|
9
|
%
|
Operating income
|
$
|
12,425
|
|
|
$
|
11,628
|
|
|
7
|
%
|
|
$
|
36,684
|
|
|
$
|
32,458
|
|
|
13
|
%
|
Segment margin
|
14
|
%
|
|
15
|
%
|
|
|
|
14
|
%
|
|
14
|
%
|
|
|
|
Wealth Management revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships, our resulting financial position and operating performance. A summary of our sources of revenue and business metrics are as follows:
Sources of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Sources of Revenue
|
Primary Drivers
|
2017
|
|
2016
|
|
Percentage
Change
|
|
2017
|
|
2016
|
|
Percentage
Change
|
Advisor-driven
|
Commission
|
- Transactions
- Asset levels
|
$
|
39,432
|
|
|
$
|
38,962
|
|
|
1
|
%
|
|
$
|
117,181
|
|
|
$
|
111,070
|
|
|
6
|
%
|
Advisory
|
- Advisory asset levels
|
37,588
|
|
|
32,705
|
|
|
15
|
%
|
|
107,078
|
|
|
95,759
|
|
|
12
|
%
|
Other revenue
|
Asset-based
|
- Cash balances
- Interest rates
- Number of accounts
- Client asset levels
|
6,526
|
|
|
5,476
|
|
|
19
|
%
|
|
19,276
|
|
|
16,689
|
|
|
16
|
%
|
Transaction and fee
|
- Account activity
- Number of clients
- Number of advisors
- Number of accounts
|
3,263
|
|
|
2,945
|
|
|
11
|
%
|
|
11,237
|
|
|
9,978
|
|
|
13
|
%
|
|
Total revenue
|
$
|
86,809
|
|
|
$
|
80,088
|
|
|
8
|
%
|
|
$
|
254,772
|
|
|
$
|
233,496
|
|
|
9
|
%
|
|
Total recurring revenue
|
$
|
70,539
|
|
|
$
|
62,543
|
|
|
13
|
%
|
|
$
|
203,417
|
|
|
$
|
183,772
|
|
|
11
|
%
|
|
Recurring revenue rate
|
81.3
|
%
|
|
78.1
|
%
|
|
|
|
79.8
|
%
|
|
78.7
|
%
|
|
|
Recurring revenue consists of trailing commissions, advisory fees, fees from cash sweep programs, and certain transaction and fee revenue, all as described further below in
Commission revenue
,
Advisory revenue
,
Asset-based revenue
, and
Transaction and fee revenue
, respectively. Certain recurring revenues are associated with asset balances and will fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
Business metrics
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages and as otherwise indicated)
|
September 30,
|
|
2017
|
|
2016
|
|
Percentage
Change
|
Total Assets Under Administration ("AUA")
|
$
|
42,696,862
|
|
|
$
|
38,482,620
|
|
|
11
|
%
|
Advisory Assets Under Management ("AUM")
|
$
|
11,984,320
|
|
|
$
|
10,204,448
|
|
|
17
|
%
|
Percentage of total AUA
|
28.1
|
%
|
|
26.5
|
%
|
|
|
Number of advisors (in ones)
|
4,392
|
|
|
4,568
|
|
|
(4
|
)%
|
Advisor-driven revenue per advisor
|
$
|
17.5
|
|
|
$
|
15.7
|
|
|
11
|
%
|
Total assets under administration ("AUA") includes assets that we hold directly or indirectly on behalf of clients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one AUA service for a client’s assets, the value of the asset is only counted once in the total amount of AUA. AUA assets include Advisory Assets under Management, non-advisory brokerage accounts, annuities and mutual fund positions held directly with fund companies. These assets are not reported on the consolidated balance sheets.
Advisory assets under management ("AUM") includes external client assets for which we provide investment advisory and management services, typically as a fiduciary under the Investment Advisers Act of 1940. Our compensation for providing such services is typically a fee based on the value of the AUM for each advisory client. These assets are not reported on the consolidated balance sheets
.
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Wealth Management revenue
increase
d approximately
$6.7 million
as discussed by each source of revenue below.
Wealth Management operating income
increase
d approximately
$0.8 million
, consisting of the
$6.7 million
increase
in revenue and offset by a
$5.9 million
increase
in operating expenses. The
increase
in Wealth Management operating expenses was primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Wealth Management revenue
increase
d approximately
$21.3 million
as discussed by each source of revenue below.
Wealth Management operating income
increase
d approximately
$4.2 million
, consisting of the
$21.3 million
increase
in revenue and offset by an
$17.1 million
increase
in operating expenses. The
increase
in Wealth Management operating expenses was primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher net personnel expenses as we continue to standardize employee benefits across our businesses.
Commission revenue:
We generate two types of commissions: transaction-based sales commissions and trailing commissions. Transaction-based sales commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial advisors. The level of transaction-based sales commissions can vary from period-to-period based on the overall economic environment, number of trading days in the reporting period, and investment activity of our financial advisors' clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on mutual funds and variable annuities held by clients. Trailing commissions are recurring in nature and are based on the market value of investment holdings in trail-eligible assets. Our commission revenue, by product category and by sales-based and trailing, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Percentage
Change
|
|
2017
|
|
2016
|
|
Percentage
Change
|
By product category:
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
$
|
21,128
|
|
|
$
|
20,196
|
|
|
5
|
%
|
|
$
|
62,371
|
|
|
$
|
59,021
|
|
|
6
|
%
|
Variable annuities
|
12,879
|
|
|
12,395
|
|
|
4
|
%
|
|
36,820
|
|
|
35,725
|
|
|
3
|
%
|
Insurance
|
3,037
|
|
|
3,689
|
|
|
(18
|
)%
|
|
9,715
|
|
|
8,836
|
|
|
10
|
%
|
General securities
|
2,388
|
|
|
2,682
|
|
|
(11
|
)%
|
|
8,275
|
|
|
7,488
|
|
|
11
|
%
|
Total commission revenue
|
$
|
39,432
|
|
|
$
|
38,962
|
|
|
1
|
%
|
|
$
|
117,181
|
|
|
$
|
111,070
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
By sales-based and trailing:
|
|
|
|
|
|
|
|
|
|
|
|
Sales-based
|
$
|
15,590
|
|
|
$
|
16,925
|
|
|
(8
|
)%
|
|
$
|
49,190
|
|
|
$
|
47,703
|
|
|
3
|
%
|
Trailing
|
23,842
|
|
|
22,037
|
|
|
8
|
%
|
|
67,991
|
|
|
63,367
|
|
|
7
|
%
|
Total commission revenue
|
$
|
39,432
|
|
|
$
|
38,962
|
|
|
1
|
%
|
|
$
|
117,181
|
|
|
$
|
111,070
|
|
|
6
|
%
|
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Sales-based commission revenue
decrease
d approximately
$1.3 million
primarily due to decreased activity in mutual funds, variable annuities, insurance and general securities resulting from overall market performance and portfolio rebalancings. General securities include equities, exchange-traded funds, bonds and alternative investments.
Trailing commission revenue
increase
d approximately
$1.8 million
and reflects an increase in the market value of the underlying assets and, to a lesser extent, the impact of new investments.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Sales-based commission revenue
increase
d approximately
$1.5 million
primarily due to increased activity in mutual funds, insurance and general securities resulting from overall market performance, portfolio rebalancings, product availability and segment refocusing, partially offset by decreased activity in variable annuities.
Trailing commission revenue
increase
d approximately
$4.6 million
and reflects an increase in the market value of the underlying assets and the impact of new investments.
Advisory revenue:
Advisory revenue primarily includes fees charged to clients in advisory accounts where HD Vest is the Registered Investment Advisor (
"RIA"
) and is based on the value of AUM. Advisory fees are typically billed to clients quarterly, in advance, and are recognized as revenue ratably during the quarter. The value of the assets in an advisory account on the billing date determines the amount billed and, accordingly, the revenues earned in the following three-month period. The majority of our accounts are billed in advance using values as of the last business day of the prior calendar quarter.
The activity within our AUM was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Balance, beginning of the period
|
$
|
11,551,288
|
|
|
$
|
9,814,232
|
|
|
$
|
10,397,071
|
|
|
$
|
9,692,244
|
|
Net increase (decrease) in new advisory assets
|
94,408
|
|
|
131,982
|
|
|
613,848
|
|
|
(1,357
|
)
|
Market impact and other
|
338,624
|
|
|
258,234
|
|
|
973,401
|
|
|
513,561
|
|
Balance, end of the period
|
$
|
11,984,320
|
|
|
$
|
10,204,448
|
|
|
$
|
11,984,320
|
|
|
$
|
10,204,448
|
|
Increases or decreases in advisory assets have a limited impact on advisory fee revenue in the period in which they occur. Rather, increases or decreases in advisory assets are a primary driver of future advisory fee revenue. Advisory revenue for a particular quarter is predominately driven by the prior quarter-end AUM.
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
The
increase
in advisory revenue of approximately
$4.9 million
is primarily due to the increase in the beginning-of-period AUM for the three months ended
September 30, 2017
compared with three months ended
September 30, 2016
, and the conversion of AUA to fee-based AUM.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
The
increase
in advisory revenue of approximately
$11.3 million
is consistent with the increase in the beginning-of-period AUM for the
nine
months ended
September 30, 2017
compared with
nine
months ended
September 30, 2016
, and the conversion of AUA to fee-based AUM.
Asset-based revenue:
Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs and cash sweep programs.
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Asset-based revenue increased $1.1 million, primarily from higher cash sweep revenues following increases in interest rates. In the current interest rate environment, and through our current clearing provider, we will not benefit from any future interest rate increases.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Asset-based revenue increased $2.6 million, primarily from higher cash sweep revenues following increases in interest rates. In the current interest rate environment, and through our current clearing provider, we will not benefit from any future interest rate increases.
Transaction and fee revenue:
Transaction and fee revenue primarily includes fees for executing certain transactions in client accounts and fees related to services provided and other account charges as generally outlined in agreements with financial advisors, clients, and financial institutions.
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Transaction and fee revenue
increase
d approximately
$0.3 million
primarily related to advisor fee increases.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Transaction and fee revenue
increase
d approximately
$1.3 million
primarily related to advisor fee increases.
Tax Preparation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Percentage
Change
|
|
2017
|
|
2016
|
|
Percentage
Change
|
Revenue
|
$
|
3,362
|
|
|
$
|
3,149
|
|
|
7
|
%
|
|
$
|
156,936
|
|
|
$
|
135,614
|
|
|
16
|
%
|
Operating income (loss)
|
$
|
(6,238
|
)
|
|
$
|
(4,382
|
)
|
|
42
|
%
|
|
$
|
83,410
|
|
|
$
|
72,987
|
|
|
14
|
%
|
Segment margin
|
(186
|
)%
|
|
(139
|
)%
|
|
|
|
53
|
%
|
|
54
|
%
|
|
|
Tax Preparation revenue is derived primarily from sales of our consumer tax preparation software and online services as well as other offerings and ancillary services to consumers and small business owners. We also generate revenue through the professional tax preparer software that we sell to professional tax preparers who use it to prepare and file individual and business returns for their clients.
We measure our consumer tax preparation customers using the number of accepted federal tax e-files made through our software and online services. We consider growth in the number of e-files to be an important non-financial metric in measuring the performance of the consumer side of the Tax Preparation business.
We measure our professional tax preparer customers using three metrics--the number of accepted federal tax e-files made through our software, the number of units sold, and the number of e-files per unit sold. We consider growth in these areas to be important non-financial metrics in measuring the performance of the professional tax preparer side of the Tax Preparation business.
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Tax Preparation revenue was comparable to the prior period.
Tax Preparation operating loss increased approximately
$1.9 million
, consisting of the
$0.2 million
increase
in revenue and offset by a
$2.1 million
increase
in operating expenses. The
increase
in Tax Preparation segment operating expenses was primarily due to higher maintenance fees, development costs and personnel expenses resulting from overall increased headcount supporting most functions.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Tax Preparation revenue
increase
d approximately
$21.3 million
primarily due to growth in revenue earned from online consumer users and, to a lesser extent, increased sales of our professional tax preparer software. Online consumer revenue grew, despite a decrease in e-files, due to growth in average revenue per user, primarily resulting from price increases. The decrease in e-files is consistent with our expectations as we are in the early stages of a multi-year pivot toward profitable customers. Revenue derived from professional tax preparers increased primarily due to an
increase
in the number of professional preparer units sold.
Tax Preparation operating income
increase
d approximately
$10.4 million
, consisting of the
$21.3 million
increase
in revenue and offset by a
$10.9 million
increase
in operating expenses. The
increase
in Tax Preparation segment operating expenses was primarily due to higher spending on marketing, higher professional services fees mostly related to marketing and development projects, higher data center costs related to software support and maintenance fees, increases in growth initiative investments, and higher personnel expenses resulting from overall increased headcount supporting most functions.
Corporate-Level Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Operating expenses
|
$
|
4,587
|
|
|
$
|
4,907
|
|
|
$
|
(320
|
)
|
|
$
|
17,823
|
|
|
$
|
14,066
|
|
|
$
|
3,757
|
|
Stock-based compensation
|
3,132
|
|
|
3,364
|
|
|
(232
|
)
|
|
8,434
|
|
|
10,616
|
|
|
(2,182
|
)
|
Acquisition-related costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
391
|
|
|
(391
|
)
|
Depreciation
|
1,023
|
|
|
1,137
|
|
|
(114
|
)
|
|
3,216
|
|
|
3,386
|
|
|
(170
|
)
|
Amortization of acquired intangible assets
|
8,665
|
|
|
8,346
|
|
|
319
|
|
|
25,337
|
|
|
25,694
|
|
|
(357
|
)
|
Restructuring
|
106
|
|
|
—
|
|
|
106
|
|
|
2,726
|
|
|
—
|
|
|
2,726
|
|
Total corporate-level activity
|
$
|
17,513
|
|
|
$
|
17,754
|
|
|
$
|
(241
|
)
|
|
$
|
57,536
|
|
|
$
|
54,153
|
|
|
$
|
3,383
|
|
Certain corporate-level activity is not allocated to our segments, including certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition-related costs, depreciation, amortization of acquired intangible assets, and restructuring. For further detail, refer to segment information appearing in "Note 11: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Operating expenses, stock-based compensation, depreciation, amortization of acquired intangible assets and restructuring were comparable to the prior period.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Operating expenses included in corporate-level activity
increase
d primarily due to Strategic Transformation Costs and costs associated with leadership changes at HD Vest.
Stock-based compensation
decrease
d primarily due to fewer grants in the current year and higher expense recognized in the prior year related to HD Vest grants in 2016 that were made in connection with the HD Vest acquisition, partially offset by activity within our Tax Preparation business due to prior forfeitures.
Acquisition-related costs include professional fees and other direct transaction costs and changes in the fair value of contingent consideration liabilities related to acquired companies. The SimpleTax acquisition that was completed in 2015 included contingent consideration, for which the fair value of that liability was revalued in the second quarter of 2016. The change in the fair value of the contingent consideration liability is recognized in the period in which the fair value changes.
Amortization of acquired intangible assets were comparable to the prior period.
Restructuring relates to expenses incurred due to our October 27, 2016 announcement to relocate our corporate headquarters by
June 2017
from Bellevue, Washington to Irving, Texas. Further detail is provided under the "Operating Expenses - Restructuring" section of the management's discussion and analysis of financial condition and results of operations below.
OPERATING EXPENSES
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Wealth management services cost of revenue
|
$
|
59,607
|
|
|
$
|
54,921
|
|
|
$
|
4,686
|
|
|
$
|
172,444
|
|
|
$
|
158,213
|
|
|
$
|
14,231
|
|
Tax preparation services cost of revenue
|
1,314
|
|
|
1,319
|
|
|
(5
|
)
|
|
7,543
|
|
|
6,549
|
|
|
994
|
|
Amortization of acquired technology
|
50
|
|
|
49
|
|
|
1
|
|
|
145
|
|
|
765
|
|
|
(620
|
)
|
Total cost of revenue
|
$
|
60,971
|
|
|
$
|
56,289
|
|
|
$
|
4,682
|
|
|
$
|
180,132
|
|
|
$
|
165,527
|
|
|
$
|
14,605
|
|
Percentage of revenue
|
68
|
%
|
|
68
|
%
|
|
|
|
44
|
%
|
|
45
|
%
|
|
|
We record the cost of revenue for sales of services when the related revenue is recognized. Cost of revenue consists of costs related to our Wealth Management and Tax Preparation businesses, which include commissions paid to financial advisors, third-party costs, and costs associated with the technical support team and the operation of our data centers. Data center costs include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, professional services fees (which include technology project consulting fees), software support and maintenance, bandwidth and hosting costs, and depreciation. Cost of revenue also includes the amortization of acquired technology.
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Wealth management services cost of revenue
increase
d primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher stock-based compensation costs related to grants to certain HD Vest financial advisors.
Tax preparation services cost of revenue was comparable to the prior period.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Wealth management services cost of revenue
increase
d primarily due to an increase in commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher stock-based compensation costs related to grants to certain HD Vest financial advisors.
Tax preparation services cost of revenue increased primarily due to an increase in data center costs related to software support and maintenance fees.
Amortization of acquired technology decreased due to amortization expense associated with concluding the useful life of certain TaxAct acquisition-related intangible assets during 2016.
Engineering and Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Engineering and technology
|
$
|
5,051
|
|
|
$
|
4,588
|
|
|
$
|
463
|
|
|
$
|
14,041
|
|
|
$
|
12,842
|
|
|
$
|
1,199
|
|
Percentage of revenue
|
6
|
%
|
|
6
|
%
|
|
|
|
3
|
%
|
|
3
|
%
|
|
|
Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, which include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, software support and maintenance, bandwidth and hosting, and professional services fees.
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Engineering and technology expenses were comparable to the prior period.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Engineering and technology expenses increased primarily due to an increase in professional services fees mostly related to Tax Preparation development projects.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Sales and marketing
|
$
|
13,680
|
|
|
$
|
11,965
|
|
|
$
|
1,715
|
|
|
$
|
84,974
|
|
|
$
|
75,715
|
|
|
$
|
9,259
|
|
Percentage of revenue
|
15
|
%
|
|
14
|
%
|
|
|
|
21
|
%
|
|
21
|
%
|
|
|
|
Sales and marketing expenses consist principally of personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs) and the cost of temporary help and contractors for those engaged in marketing, selling, and sales support operations activities, marketing expenses associated with our HD Vest and TaxAct businesses (which primarily include television, radio, online, text, email, and sponsorship channels), and back office processing support expenses associated with our HD Vest business (occupancy and general office expenses, regulatory fees, and license fees).
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Sales and marketing expenses increased primarily due to a $0.6 million increase in marketing expenses and a $1.0 million increase in personnel expenses. The increase in marketing expenses was driven by increased marketing and software support in our Tax Preparation business. Personnel expenses increased primarily in our Wealth Management business due to higher headcount.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Sales and marketing expenses increased primarily due to a $5.8 million increase in marketing expenses and a $2.6 million increase in personnel expenses. The increase in marketing expenses was driven by increased marketing in our Tax Preparation business. Personnel expenses increased primarily as we continue to standardize employee benefits across our businesses, and higher headcount across our businesses.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
General and administrative
|
$
|
12,207
|
|
|
$
|
11,638
|
|
|
$
|
569
|
|
|
$
|
39,405
|
|
|
$
|
35,899
|
|
|
$
|
3,506
|
|
Percentage of revenue
|
14
|
%
|
|
14
|
%
|
|
|
|
10
|
%
|
|
10
|
%
|
|
|
General and administrative (
"G&A"
) expenses consist primarily of personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, professional services fees (which include legal, audit, and tax fees), general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
G&A expenses increased primarily due to a $0.8 million increase in personnel expenses, mainly related to Strategic Transformation Costs, offset by lower stock-based compensation due to fewer grants in the current year and higher expense recognized in the prior year related to the timing of grants.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
G&A expenses increased primarily due to a $5.6 million net increase in personnel expenses, mainly related to Strategic Transformation Costs and costs associated with leadership changes at HD Vest, offset by lower stock-based compensation due to fewer grants in the current year and higher expense recognized in the prior year related to the timing of grants.
Depreciation and Amortization of Acquired Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Depreciation
|
$
|
867
|
|
|
$
|
968
|
|
|
$
|
(101
|
)
|
|
$
|
2,680
|
|
|
$
|
2,906
|
|
|
$
|
(226
|
)
|
Amortization of acquired intangible assets
|
8,615
|
|
|
8,297
|
|
|
318
|
|
|
25,192
|
|
|
24,929
|
|
|
263
|
|
Total
|
$
|
9,482
|
|
|
$
|
9,265
|
|
|
$
|
217
|
|
|
$
|
27,872
|
|
|
$
|
27,835
|
|
|
$
|
37
|
|
Percentage of revenue
|
11
|
%
|
|
11
|
%
|
|
|
|
7
|
%
|
|
8
|
%
|
|
|
Depreciation of property and equipment includes depreciation of computer equipment and software, office equipment and furniture, and leasehold improvements not recognized in cost of revenue. Amortization of acquired intangible assets primarily includes the amortization of customer relationships, which are amortized over their estimated lives. Depreciation and amortization expenses were comparable to the prior periods.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Restructuring
|
$
|
106
|
|
|
$
|
—
|
|
|
$
|
106
|
|
|
$
|
2,726
|
|
|
$
|
—
|
|
|
$
|
2,726
|
|
Percentage of revenue
|
—
|
%
|
|
—
|
%
|
|
|
|
1
|
%
|
|
—
|
%
|
|
|
In connection with the Strategic Transformation, including the relocation of our headquarters, we have incurred restructuring costs of approximately
$6.6 million
, which includes all costs associated with our non-cancelable operating lease. While the relocation and the related costs were substantially completed by
June 2017
, the Company expects some costs through early 2018, primarily related to employees who will continue to provide service through that time period.
See "Note 5: Restructuring" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Other Loss, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Interest income
|
$
|
(31
|
)
|
|
$
|
(18
|
)
|
|
$
|
(13
|
)
|
|
$
|
(76
|
)
|
|
$
|
(54
|
)
|
|
$
|
(22
|
)
|
Interest expense
|
4,781
|
|
|
7,824
|
|
|
(3,043
|
)
|
|
16,746
|
|
|
25,396
|
|
|
(8,650
|
)
|
Amortization of debt issuance costs
|
177
|
|
|
413
|
|
|
(236
|
)
|
|
891
|
|
|
1,440
|
|
|
(549
|
)
|
Accretion of debt discounts
|
53
|
|
|
1,099
|
|
|
(1,046
|
)
|
|
1,893
|
|
|
3,599
|
|
|
(1,706
|
)
|
(Gain) loss on debt extinguishment
|
183
|
|
|
2,205
|
|
|
(2,022
|
)
|
|
19,764
|
|
|
(641
|
)
|
|
20,405
|
|
Other
|
78
|
|
|
(70
|
)
|
|
148
|
|
|
(69
|
)
|
|
143
|
|
|
(212
|
)
|
Other loss, net
|
$
|
5,241
|
|
|
$
|
11,453
|
|
|
$
|
(6,212
|
)
|
|
$
|
39,149
|
|
|
$
|
29,883
|
|
|
$
|
9,332
|
|
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
In the second and third quarter of 2017 we had a loss on debt extinguishment related to prepayments of a portion of the credit facility entered into on May 22, 2017. In the first half of 2017, the third quarter of 2016 and the nine months ended September 30, 2016, we had a loss on debt extinguishment related to the credit facility previously entered into in 2015 for the purpose of financing the HD Vest acquisition (the "TaxAct - HD Vest 2015 credit facility"). In 2016, we made prepayments on a portion of the TaxAct - HD Vest 2015 credit facility, which resulted in the acceleration of a portion of the unamortized debt discount and issuance costs. In connection with the refinancing through the senior secured credit facility that was entered into in May 2017, we paid-off the remaining TaxAct - HD Vest 2015 credit facility and wrote-off the remaining unamortized debt discount and issuance costs. Consequently, the TaxAct - HD Vest 2015 credit facility was terminated. For further detail, see "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
The decrease in interest expense, amortization of debt issuance costs, and accretion of debt discounts primarily related to lower balances in the TaxAct - HD Vest 2015 credit facility and the Convertible Senior Notes (the
"Notes"
) due to prepayments
on a portion of the TaxAct - HD Vest 2015 credit facility in 2016 and the redemption of all of the Notes in the second quarter of 2017.
Detail on the "
(gain) loss on debt extinguishment
" is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Write-off of debt discount and debt issuance costs on TaxAct - HD Vest 2015 credit facility (related to closure)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,593
|
|
|
$
|
—
|
|
|
$
|
9,593
|
|
Write-off of debt discount and debt issuance costs on the Notes (related to termination)
|
—
|
|
|
—
|
|
|
—
|
|
|
6,715
|
|
|
—
|
|
|
6,715
|
|
Accelerated accretion of debt discount and amortization of debt issuance costs on credit facilities (related to prepayments)
|
183
|
|
|
2,205
|
|
|
(2,022
|
)
|
|
3,456
|
|
|
5,039
|
|
|
(1,583
|
)
|
Gain on the Notes repurchased
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,724
|
)
|
|
7,724
|
|
Accelerated accretion of debt discount on the Notes (related to repurchase)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,628
|
|
|
(1,628
|
)
|
Accelerated amortization of debt issuance costs on the Notes (related to repurchase)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
416
|
|
|
(416
|
)
|
Total (gain) loss on debt extinguishment
|
$
|
183
|
|
|
$
|
2,205
|
|
|
$
|
(2,022
|
)
|
|
$
|
19,764
|
|
|
$
|
(641
|
)
|
|
$
|
20,405
|
|
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
Interest expense, amortization of debt issuance costs, accretion of debt discounts, and
(gain) loss on debt extinguishment
were affected by the same factors described above that impacted the quarterly period.
In the first quarter of 2016, we repurchased a portion of the Notes, which resulted in a net gain on debt extinguishment, consisting of a gain related to the repurchase of the Notes below par value and offset by the acceleration of a portion of the unamortized debt discount and issuance costs. In connection with the refinancing through the senior secured credit facility, we redeemed all of the Notes in the second quarter of 2017, which resulted in the write-off of the remaining unamortized debt discount and issuance costs as a loss on debt extinguishment.
Income Taxes
We recorded
income tax expense
of
$0.2 million
and
$6.0 million
in the three and
nine months ended September 30, 2017
, respectively. Income taxes differed from taxes at the statutory rates in
2017
primarily due to the January 1, 2017 implementation of Accounting Standards Update (
"ASU"
) 2016-09 on stock-based compensation (see "Note 2: Summary of Significant Accounting Policies" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information). We recorded income tax benefit of
$8.5 million
and
income tax expense
of
$8.9 million
in the three and
nine months ended September 30, 2016
, respectively. Income taxes differed from taxes at the statutory rates in
2016
primarily due to the domestic manufacturing deduction, offset by non-deductible compensation and state income taxes.
Discontinued Operations, Net of Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Discontinued operations, net of income taxes
|
$
|
—
|
|
|
$
|
(40,528
|
)
|
|
$
|
40,528
|
|
|
$
|
—
|
|
|
$
|
(57,981
|
)
|
|
$
|
57,981
|
|
On October 14, 2015, we announced our Strategic Transformation, which included plans to divest the Search and Content and E-Commerce businesses. Our results of operations reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Amounts in discontinued operations include previously unallocated
depreciation, amortization, stock-based compensation, income taxes, and other corporate expenses that were attributable to the Search and Content and E-Commerce businesses. We completed both divestitures in 2016--specifically, Search and Content in the third quarter of 2016 and E-Commerce in the fourth quarter of 2016. See "Note 4: Discontinued Operations" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information on discontinued operations.
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA:
We define Adjusted EBITDA as
net income (loss)
attributable to Blucora, Inc., determined in accordance with GAAP, excluding the effects of stock-based compensation, depreciation, amortization of acquired intangible assets (including acquired technology), restructuring, other loss, net, the impact of noncontrolling interests, income tax expense, the effects of discontinued operations, and acquisition-related costs. Restructuring costs relate to the move of our corporate headquarters, which was announced in the fourth quarter of 2016. Acquisition-related costs include professional services fees and other direct transaction costs and changes in the fair value of contingent consideration liabilities related to acquired companies. The SimpleTax acquisition that was completed in 2015 included contingent consideration, for which the fair value of that liability was revalued in the second quarter of 2016. For further detail, see "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
We believe that Adjusted EBITDA provides meaningful supplemental information regarding our performance. We use this non-GAAP financial measure for internal management and compensation purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. We believe that Adjusted EBITDA is a common measure used by investors and analysts to evaluate our performance, that it provides a more complete understanding of the results of operations and trends affecting our business when viewed together with GAAP results, and that management and investors benefit from referring to this non-GAAP financial measure. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business and, therefore, Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP
net income (loss)
. Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies. A reconciliation of our Adjusted EBITDA to
net income (loss)
attributable to Blucora, Inc., which we believe to be the most comparable GAAP measure, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss) attributable to Blucora, Inc.
|
$
|
(16,897
|
)
|
|
$
|
(54,119
|
)
|
|
$
|
16,991
|
|
|
$
|
(45,897
|
)
|
Stock-based compensation
|
3,132
|
|
|
3,364
|
|
|
8,434
|
|
|
10,616
|
|
Depreciation and amortization of acquired intangible assets
|
9,688
|
|
|
9,483
|
|
|
28,553
|
|
|
29,080
|
|
Restructuring
|
106
|
|
|
—
|
|
|
2,726
|
|
|
—
|
|
Other loss, net
|
5,241
|
|
|
11,453
|
|
|
39,149
|
|
|
29,883
|
|
Net income attributable to noncontrolling interests
|
164
|
|
|
167
|
|
|
466
|
|
|
426
|
|
Income tax expense (benefit)
|
166
|
|
|
(8,537
|
)
|
|
5,952
|
|
|
8,899
|
|
Discontinued operations, net of income taxes
|
—
|
|
|
40,528
|
|
|
—
|
|
|
57,981
|
|
Acquisition-related costs
|
—
|
|
|
—
|
|
|
—
|
|
|
391
|
|
Adjusted EBITDA
|
$
|
1,600
|
|
|
$
|
2,339
|
|
|
$
|
102,271
|
|
|
$
|
91,379
|
|
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
The
decrease
in Adjusted EBITDA was primarily due to an
increase
in segment operating loss of
$1.9 million
related to our Tax Preparation segment, an increase in segment operating income of
$0.8 million
related to our Wealth Management segment, and a
$0.3 million
decrease
in corporate operating expenses not allocated to the segments primarily due to changes in headcount across most functions.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
The
increase
in Adjusted EBITDA was primarily due to
increase
s in segment operating income of
$10.4 million
and
$4.2 million
related to our Tax Preparation and Wealth Management segments, respectively, offset by a
$3.8 million
increase
in
corporate operating expenses not allocated to the segments primarily due to Strategic Transformation Costs and increased headcount supporting most functions, partially offset by lower stock-based compensation costs.
Non-GAAP
net income (loss)
:
We define non-GAAP
net income (loss)
as
net income (loss)
attributable to Blucora, Inc., determined in accordance with GAAP, excluding the effects of discontinued operations, stock-based compensation, amortization of acquired intangible assets (including acquired technology), accretion of debt discount and accelerated accretion of debt discount on the Convertible Senior Notes (the
"Notes"
), gain on the Notes repurchased, write-off of debt discount and debt issuance costs on the Notes that were redeemed and the terminated TaxAct - HD Vest 2015 credit facility, acquisition-related costs (described further under
Adjusted EBITDA
above), restructuring costs (described further under
Adjusted EBITDA
above), the impact of noncontrolling interests, the related cash tax impact of those adjustments, and non-cash income taxes. The write-off of debt discount and debt issuance costs on the terminated Notes and the closed TaxAct - HD Vest 2015 credit facility relates to the debt refinancing that occurred in the second quarter of 2017. We exclude the non-cash portion of income taxes because of our ability to offset a substantial portion of our cash tax liabilities by using deferred tax assets, which primarily consist of U.S. federal net operating losses. The majority of these net operating losses will expire, if unutilized, between 2020 and 2024.
We believe that non-GAAP
net income (loss)
and non-GAAP
net income (loss)
per share provide meaningful supplemental information to management, investors, and analysts regarding our performance and the valuation of our business by excluding items in the statement of operations that we do not consider part of our ongoing operations or have not been, or are not expected to be, settled in cash. Additionally, we believe that non-GAAP
net income (loss)
and non-GAAP
net income (loss)
per share are common measures used by investors and analysts to evaluate our performance and the valuation of our business. Non-GAAP
net income (loss)
should be evaluated in light of our financial results prepared in accordance with GAAP and should be considered as a supplement to, and not as a substitute for or superior to, GAAP
net income (loss)
. Other companies may calculate non-GAAP net income differently, and, therefore, our non-GAAP net income may not be comparable to similarly titled measures of other companies. A reconciliation of our non-GAAP net income to net income attributable to Blucora, Inc., which we believe to be the most comparable GAAP measure, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss) attributable to Blucora, Inc.
|
$
|
(16,897
|
)
|
|
$
|
(54,119
|
)
|
|
$
|
16,991
|
|
|
$
|
(45,897
|
)
|
Discontinued operations, net of income taxes
|
—
|
|
|
40,528
|
|
|
—
|
|
|
57,981
|
|
Stock-based compensation
|
3,132
|
|
|
3,364
|
|
|
8,434
|
|
|
10,616
|
|
Amortization of acquired intangible assets
|
8,665
|
|
|
8,346
|
|
|
25,337
|
|
|
25,694
|
|
Impairment of goodwill and intangible assets
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Accretion of debt discount on the Notes
|
—
|
|
|
901
|
|
|
1,567
|
|
|
2,749
|
|
Accelerated accretion of debt discount on the Notes repurchased
|
—
|
|
|
—
|
|
|
—
|
|
|
1,628
|
|
Gain on the Notes repurchased
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,724
|
)
|
Write-off of debt discount and debt issuance costs on terminated Notes
|
—
|
|
|
—
|
|
|
6,715
|
|
|
—
|
|
Write-off of debt discount and debt issuance costs on terminated TaxAct - HD Vest 2015 credit facility
|
—
|
|
|
—
|
|
|
9,593
|
|
|
—
|
|
Acquisition-related costs
|
—
|
|
|
—
|
|
|
—
|
|
|
391
|
|
Restructuring
|
106
|
|
|
—
|
|
|
2,726
|
|
|
—
|
|
Impact of noncontrolling interests
|
164
|
|
|
167
|
|
|
466
|
|
|
426
|
|
Cash tax impact of adjustments to GAAP net income
|
(928
|
)
|
|
(17
|
)
|
|
(3,334
|
)
|
|
244
|
|
Non-cash income tax (benefit) expense
|
224
|
|
|
(9,312
|
)
|
|
6,325
|
|
|
6,460
|
|
Non-GAAP net income (loss)
|
$
|
(5,534
|
)
|
|
$
|
(10,142
|
)
|
|
$
|
74,820
|
|
|
$
|
52,568
|
|
Per diluted share:
|
|
|
|
|
|
|
|
Net income (loss) attributable to Blucora, Inc.
|
$
|
(0.37
|
)
|
|
$
|
(1.30
|
)
|
|
$
|
0.36
|
|
|
$
|
(1.08
|
)
|
Discontinued operations, net of income taxes
|
—
|
|
|
0.97
|
|
|
—
|
|
|
1.37
|
|
Stock-based compensation
|
0.07
|
|
|
0.08
|
|
|
0.18
|
|
|
0.25
|
|
Amortization of acquired intangible assets
|
0.20
|
|
|
0.21
|
|
|
0.55
|
|
|
0.60
|
|
Accretion of debt discount on the Notes
|
—
|
|
|
0.02
|
|
|
0.03
|
|
|
0.06
|
|
Accelerated accretion of debt discount on the Notes repurchased
|
—
|
|
|
—
|
|
|
—
|
|
|
0.04
|
|
Gain on the Notes repurchased
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.18
|
)
|
Write-off of debt discount and debt issuance costs on terminated Notes
|
—
|
|
|
—
|
|
|
0.14
|
|
|
—
|
|
Write-off of debt discount and debt issuance costs on closed TaxAct - HD Vest 2015 credit facility
|
—
|
|
|
—
|
|
|
0.20
|
|
|
—
|
|
Acquisition-related costs
|
—
|
|
|
—
|
|
|
—
|
|
|
0.01
|
|
Restructuring
|
—
|
|
|
—
|
|
|
0.06
|
|
|
—
|
|
Impact of noncontrolling interests
|
0.00
|
|
|
0.00
|
|
|
0.01
|
|
|
0.01
|
|
Cash tax impact of adjustments to GAAP net income
|
(0.02
|
)
|
|
(0.00
|
)
|
|
(0.07
|
)
|
|
0.01
|
|
Non-cash income tax (benefit) expense
|
0.00
|
|
|
(0.22
|
)
|
|
0.14
|
|
|
0.15
|
|
Non-GAAP net income (loss)
|
$
|
(0.12
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
1.60
|
|
|
$
|
1.24
|
|
Weighted average shares outstanding used in computing per diluted share amounts
|
45,459
|
|
|
41,635
|
|
|
46,813
|
|
|
42,329
|
|
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
The decrease in non-GAAP
net loss
was primarily due to an increase in segment operating loss of
$1.9 million
related to our Tax Preparation segment and an increase in segment operating income of
$0.8 million
related to our Wealth Management segment. Further contributing to the decrease in non-GAAP
net loss
was a
$3.4 million
decrease
in interest expense, amortization of debt issuance costs, and accretion of debt discounts, primarily related to lower balances in the TaxAct - HD Vest 2015 credit facility and the Notes due to pay-off of the entire TaxAct - HD Vest 2015 credit facility and redemption of all of the Notes, respectively, in the second quarter of 2017, and a
$2.0 million
decrease in loss on debt extinguishment related to the TaxAct - HD Vest 2015 credit facility. The decreases in non-GAAP
net loss
were offset by a
$0.3 million
decrease
in corporate operating expenses not allocated to the segments primarily due to changes in headcount across most functions.
Nine months ended September 30, 2017
compared with
nine months ended September 30, 2016
The
increase
in non-GAAP
net income
was primarily due to
increase
s in segment operating income of
$10.4 million
and
$4.2 million
related to our Tax Preparation and Wealth Management segments, respectively. Further contributing to the
increase
in non-GAAP
net income
was a
$9.7 million
decrease
in interest expense, amortization of debt issuance costs, and accretion of debt discounts, primarily related to lower balances in the TaxAct - HD Vest 2015 credit facility and the Notes due to pay-off of the entire credit facility and redemption of all of the Notes, respectively, in the second quarter of 2017, and a $2.3 million decrease in loss on debt extinguishment related to the TaxAct - HD Vest 2015 credit facility. The
increase
s in non-GAAP
net income
were offset by a
$3.8 million
increase
in corporate operating expenses not allocated to the segments primarily due to Strategic Transformation Costs and increased headcount supporting most functions, partially offset by lower stock-based compensation costs, and a $0.8 million increase in taxes due to an increase in non-GAAP income.
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents, and Short-Term Investments
Our principal source of liquidity is our cash, cash equivalents, and short-term investments. As of
September 30, 2017
, we had cash and marketable investments of approximately
$78.6 million
, consisting entirely of cash and cash equivalents. Our HD Vest broker-dealer subsidiary operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to HD Vest's operations. As of
September 30, 2017
, HD Vest met all capital adequacy requirements to which it was subject.
We generally invest our excess cash in high quality marketable investments. These investments generally include debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities and publicly-held corporations, as well as commercial paper, insured time deposits with commercial banks, and money market funds invested in securities issued by agencies of the U.S., although specific holdings can vary from period to period depending upon our cash requirements. Our financial instrument investments held at
September 30, 2017
had minimal default risk and short-term maturities.
We have financed our operations primarily from cash provided by operating activities. Accordingly, we believe that the cash generated from our operations and the cash and cash equivalents we have on hand will be sufficient to meet our operating, working capital, and capital expenditure requirements for at least the next 12 months. However, the underlying levels of revenues and expenses that we project may not prove to be accurate. For further discussion of the risks to our business related to liquidity, see the Risk Factor "Existing cash and cash equivalents, short-term investments, and cash generated from operations may not be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures" in Part II Item 8 of our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Use of Cash
We may use our cash, cash equivalents, and short-term investments balance in the future on investment in our current businesses, for repayment of debt, for acquiring companies or assets that complement our Wealth Management and Tax Preparation businesses, or for returning capital to shareholders.
On
May 22, 2017
, we entered into an agreement for a new senior secured credit facility for the purposes of refinancing the TaxAct - HD Vest 2015 credit facility, redeeming the Notes, and providing future working capital and capital expenditure flexibility. Consequently, the TaxAct - HD Vest 2015 credit facility was repaid in full and the commitments under the TaxAct - HD Vest revolving credit facility were terminated. The Blucora senior secured credit facility consists of a committed
$50.0 million
revolving credit loan, which includes a letter of credit sub-facility, and a
$375.0 million
term loan for an aggregate
$425.0 million
credit facility. The final maturity dates of the revolving credit loan and term loan are
May 22, 2022
and
May 22, 2024
, respectively. The interest rates on the revolving credit loan and term loan are variable. The credit facility includes financial and operating covenants with respect to certain ratios, including a net leverage ratio, which are defined further in the credit facility agreement. We were in compliance with these covenants as of
September 30, 2017
. We initially borrowed
$375.0 million
under the term loan. Through the third quarter of 2017, we have made prepayments of
$25.0 million
million towards the term loan. We have not borrowed any amounts under the revolving credit loan. For further detail, see "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Related to the TaxAct - HD Vest 2015 credit facility, we had repayment activity of
$64.0 million
and
$105.0 million
during the
nine months ended September 30, 2017
and
2016
, respectively. Related to the Notes, we repurchased
$28.4 million
of the Notes' for cash of
$20.7 million
during the
nine months ended September 30, 2016
. For further detail, see "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
On
July 2, 2015
, TaxAct acquired SimpleTax, which included additional consideration of up to
C$4.6 million
(with C$ indicating Canadian dollars and amounting to approximately
$3.7 million
based on the acquisition-date exchange rate). The related payments are contingent upon product availability and revenue performance over a three-year period and are expected to occur annually over that period. The first payment was made in the first quarter of 2017, and the remaining payments of
$2.7 million
are expected through 2019. For further detail, see "Note 6: Fair Value Measurements" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Contractual Obligations and Commitments
The material events during 2017, outside of the ordinary course of our business, include debt activity (as discussed further in "Note 7: Debt"), payment of a portion of the acquisition-related contingent consideration liability (as discussed further in "Note 6: Fair Value Measurements"), estimated sublease income of
$3.8 million
primarily related to the sublease agreement for the Bellevue facility (as discussed further in "Note 5: Restructuring"), purchase commitments with a vendor to provide cloud computation services of $11.3 million over the next four years, and a commitment to switch to a new clearing firm provider that has been selected by the Company by the third quarter of 2018. Additional information on our Commitments and Contingencies can be found in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements other than operating leases.
Cash Flows
Our cash flows were comprised of the following:
|
|
|
|
|
|
|
|
|
(In thousands)
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
Net cash provided by operating activities from continuing operations
|
$
|
79,230
|
|
|
$
|
88,537
|
|
Net cash provided by investing activities from continuing operations
|
3,283
|
|
|
2,225
|
|
Net cash used by financing activities from continuing operations
|
(58,649
|
)
|
|
(124,571
|
)
|
Net cash provided (used) by continuing operations
|
23,864
|
|
|
(33,809
|
)
|
Net cash provided by discontinued operations
|
1,028
|
|
|
46,589
|
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
86
|
|
|
(15
|
)
|
Net increase in cash, cash equivalents, and restricted cash
|
$
|
24,978
|
|
|
$
|
12,765
|
|
Net cash from the operating activities of continuing operations:
Net cash from the operating activities of continuing operations consists of
income from continuing operations
, offset by certain non-cash adjustments, and changes in our working capital.
Net cash provided by operating activities was
$79.2 million
and
$88.5 million
for the
nine months ended September 30, 2017
and
2016
, respectively. The activity in the
nine months ended September 30, 2017
included a
$1.2 million
working capital contribution and approximately
$78.0 million
of income from continuing operations (offset by non-cash adjustments). The working capital contribution primarily related to the impact of TaxAct's seasonality, HD Vest 2016 prepayments, recognition of deferred revenues in our Tax Preparation segment and restructuring activities.
The activity in the
nine months ended September 30, 2016
included a
$43.8 million
working capital contribution and approximately
$44.7 million
of income from continuing operations (offset by non-cash adjustments). The working capital contribution was driven by accrued expenses and the impact of excess tax benefits from stock-based activity primarily due to utilizing net operating loss carryforwards from prior years. In addition, in connection with the acquisition of HD Vest, we had placed into escrow
$20.0 million
of additional consideration that was contingent upon HD Vest's 2015 earnings performance, and that amount was returned to us in the first quarter of 2016 since it was not achieved (see "Note 3: Business Combinations" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information).
Net cash from the investing activities of continuing operations:
Net cash from the investing activities of continuing operations primarily consists of cash outlays for business acquisitions, transactions (purchases of and proceeds from sales and
maturities) related to our investments, and purchases of property and equipment. Our investing activities can fluctuate from period-to-period primarily based upon the level of acquisition activity.
Net cash provided by investing activities was
$3.3 million
for the
nine months ended September 30, 2017
and net cash from investing activities was
$2.3 million
for the
nine months ended September 30, 2016
. The activity in the
nine months ended September 30, 2017
primarily consisted of net cash inflows on our available-for-sale investments of
$7.1 million
offset by approximately
$3.8 million
in purchases of property and equipment. The activity in the
nine months ended September 30, 2016
consisted of a
$1.8 million
final working capital adjustment on the HD Vest acquisition and
$2.6 million
in purchases of property and equipment, offset by net cash inflows on our available-for-sale investments of
$6.7 million
.
Net cash from the financing activities of continuing operations:
Net cash from the financing activities of continuing operations primarily consists of transactions related to the issuance of debt and stock. Our financing activities can fluctuate from period-to-period based upon our financing needs and market conditions that present favorable financing opportunities.
Net cash used by financing activities was
$58.6 million
and
$124.6 million
for the
nine months ended September 30, 2017
and
2016
, respectively. The activity for the
nine months ended September 30, 2017
primarily consisted of payments of
$285.0 million
in connection with the termination of the TaxAct - HD Vest credit facility,
$172.8 million
for redemption in full of the outstanding Notes,
$6.7 million
in tax payments from shares withheld for equity awards, and
$0.9 million
in contingent consideration paid related to the 2015 acquisition of SimpleTax. These cash outflows were offset by approximately
$367.2 million
in proceeds from the senior secured credit facility that was entered into in May 2017 and
$39.7 million
in combined proceeds from the issuance of common stock related to stock option exercises and the employee stock purchase plan.
The activity for the
nine months ended September 30, 2016
primarily consisted of payments of
$105.0 million
on the TaxAct - HD Vest credit facility, the
$20.7 million
repurchase of the Notes, and
$1.4 million
in tax payments from shares withheld for equity awards. These cash outflows were offset by approximately
$2.5 million
in combined proceeds from the issuance of common stock related to stock option exercises and the employee stock purchase plan.
Critical Accounting Policies and Estimates
Our critical accounting policies, estimates, and methodologies for the
nine months ended September 30, 2017
are consistent with those in Part II Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Recent Accounting Pronouncements
See "Note 2: Summary of Significant Accounting Policies" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risk during the
nine months ended September 30, 2017
, other than related to borrowings under the senior secured credit facility entered into on May 22, 2017. We borrowed
$375.0 million
under the term loan when we entered into the senior secured credit facility, and the interest rate on the term loan is variable at the London Interbank Offered Rate (
"LIBOR"
), subject to a floor of
1.00%
, plus a margin of
3.75%
. A hypothetical 100 basis point increase in LIBOR would result in a $3.5 million increase, based upon our
September 30, 2017
principal amount, in our annual interest expense until the scheduled maturity date in 2024. For additional information, see Part II Item 7A of our Annual Report on Form 10-K for the year ended
December 31, 2016
.